Q.Insurance premium paid during the year includes ₹2,000 relating to the period after the accounting year ends. This ₹2,000 should be:
(A) Deducted from Insurance in the P&L Account and shown as a Current Asset
(B) Added to Insurance in the P&L Account and shown as a Current Liability
(C) Ignored, since the full amount was already paid
(D) Deducted from Insurance in the P&L Account and shown as a Current Liability

This is prepaid insurance — paid in advance for a future period — so it is deducted from the expense and shown as an asset (a benefit still to come).

Apply the 'paid ahead → subtract + asset' rule for prepaid expenses.

The ₹2,000 relates to a future period beyond the current accounting year, so it has NOT yet been consumed as an expense this year — the Trial Balance's Insurance figure OVERSTATES the true expense for the year. It is deducted from Insurance in the P&L Account, and since the business has already paid for a benefit it will receive next year, it is shown as a Current Asset.

Option-by-option analysis:

• (A) Correct — this is exactly the double effect of a prepaid expense.
• (B) Incorrect — this describes the treatment of an Outstanding Expense, the opposite adjustment.
• (C) Incorrect — the year-end position must always reflect the TRUE expense for the period, regardless of when cash was paid.
• (D) Incorrect — a prepaid item is an ASSET (a future benefit), not a liability.